Lord Hope speech on the development of contract law

Last week the Institute of Law in Jersey hosted a conference on Contract Law (the programme is here). The conference was considering contract law generally, and the possibility of codification of the area. Among the speakers was Lord Hope who delivered a fascinating speech on "the role of the judge in developing contract law", published this week on the website of the Supreme Court of the United Kingdom. His comments are of particular interest in Scotland where the Scottish Law Commission is turning again to contract law in its eighth programme of law reform. The SLC project will re-examine various unimplemented reports on formation of contract, interpretation in private law, and remedies for breach of contract in the light of the publication of the Draft Common Frame of Reference.

Lord Hope's speech suggests to his Jersey audience that in considering possible reforms it should not just look to English law, and indeed he expressly concludes that

"it would seem unwise, if I may say so, for you to adopt wholesale the entirety of English contract law. In so many respects is out of keeping with that of most, if not all, of the other jurisdictions who wish to be part of the European project: as to its requirement for consideration, its rejection of the broad notions of good faith and reasonableness and its exclusion of evidence of pre-contractual negotiations, for example. It may look attractive today. That may not be so fifty years on from now, when so much more will have been done to encourage harmonisation along the lines favoured by the current generation of code-makers."

Before reaching this conclusion Lord Hope ranges widely over the development of contract law within the legal systems in the United Kingdom, examining the late nineteenth century codification projects, before moving on to consider codification generally and the possible reform of the law in Jersey. His speech is well aware of the approach at EU level to the DCFR – that mandatory codification at EU level is unlikely in the near future – and that the DCFR is a tool that can be used in a variety of ways by law reformers (in this respect he refers to Professor MacQueen's consideration of the House of Lords EU sub-committee E report on the DCFR and contract law).  He notes, for his Jersey audience – but remarks also of value to a Scottish reader:

"In contrast to the movement towards more uniformity between English and Scots law which was current there in the 1890s, there is now a much wider perspective. A wholesale incorporation of English law into the laws of Jersey and Guernsey is not the only option which is open to you. My task is to offer some reflections, from a judge’s perspective, on the question whether you should retain what you have or whether there useful lessons to be learned from the various European Contract Code projects."

But in generally discussing codification (and the proposed criminal codes prepared in Scotland and in England and Wales in recent years) notes that

"The rules of procedure, which are invariably written down, are much easier to deal with in this way than the substantive law."

In considering codification in the context of contract law, Lord Hope focuses on an aspect of the law relating to interpretation and looks at the case of Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, a case of particular interest to the Edinburgh Centre for Commercial Law as the speech of Lord Hoffman refers to our first annual lecture delivered by the late Lord Bingham, later published in (2008) Edinburgh Law Review pp. 374-390.

Lord Hope refers to Article 39 of the European Code of Contract (a project headed up by Professor Gandolfi) and quotes paragraphs 3 and 4 which provide

"3. In case of doubts arising on examination of the text which cannot be resolved by a comprehensive evaluation of that text, which doubts may be in connection with the statements or conduct of the contracting parties even after the conclusion, but compatible with the text, of the contract, the contract shall be interpreted in conformity with the common intention of the parties which can also be ascertained by recourse to extrinsic elements concerning the parties.

4. In any event the interpretation of the contract shall in no way produce effects contrary to good faith or reasonableness."

Lord Hope considered this in the context of the Chartbrook case which re-examined (and re-affirmed) the traditional analysis in both England and Scotland that pre-contractual negotiations could not be referred to in interpreting the terms of contracts (for England and Scotland see the cases referred to in WW McBryde, The Law of Contract in Scotland (3rd edn) para 8-28). Lord Hope refers to criticisms of the approach by Lord Nicholls, in "My Kingdom for a Horse: The Meaning of Words" (2005) 121 LQR 577, Professor David McLaughlan, "Contract Interpretation: What is it about?" (2009) 31.5 Sydney Law Review 5; and the different approach taken by the Unidroit Principles of International Commercial Contracts (1994 and 2004 revision) and the Principles of European Contract Law (1999) and the United Nations Convention on Contracts for the International Sale of Goods (1980), as well as the United States, Restatement (Second) Contracts. In addition he could have referred to the suggestion that the law in Scogtland could move towards the approach in the international codes by my colleagues Laura Macgregor, writing with Judge Carole Lewis in "Interpretation of Contract" in Zimmermann, Visser and Reid (eds) Mixed Legal Systems in Comparative Perspective: Property and Obligations in Scotland and South Africa (2004) 66 at p 85. However, despite the international approach the possibility of referring to pre-contractual negotiations was rejected by Lord Hoffmann. He described the approach as reflecting the French approach to interpretation (para [39]) and could not then be transplanted into the English system with its more objective approach.  His view is quoted by Lord Hope,

 "French law regards the intentions of the parties as a pure question of subjective fact, their volonté psychologique, uninfluenced by any rules of law. It follows that any evidence of what they said and did, whether to each other or to third parties, may be relevant to establishing what their intentions actually were. There is in French law a sharp distinction between the ascertainment of their intentions and the application of legal rules which may, in the interests of fairness to other parties or otherwise, limit the extent to which those intentions are given effect."

Lord Hoffmann's analysis in this respect is questionable (Lord Hope references Professor Clive's consideration of the case). But his position, with which the other judges agreed, was that there was no clearly established case for departing from the exclusionary rule. Lord Hope notes in this context, the views of Baroness Hale, as a former law commissioner.

"Baroness Hale of Richmond confessed to seeing some attraction in counsel’s invitation to reconsider the rule in Prenn v Simmonds [[1971] 1 WLR 1381] especially as the parties’ pre-contract negotiations, of which the committee had been made aware, made their position crystal clear. But she said that her experience on the Law Commission had shown her how difficult it was to achieve flexible and nuanced reform by way of legislation. The courts, on the other hand, are able to achieve step-by-step changes which can distinguish between cases where evidence of pre-contractual negotiations is helpful from cases where it is not. I echoed those remarks when I said that one of the strengths of the common law is that it can take a fresh look at itself so that it can keep pace with changing circumstances."

And stresses the practical benefits of the exclusionary rule of interpretation, contrasting it with the code provision which he suggests is limited only a principle of good faith – which is not part of the English system (albeit Lord Hope suggests that it may be part of Scots law).

"risks opening the door to an uncertain, wide-ranging and possibly fruitless inquiry at the expense of the advantages of economy and predictability which the rule in Prenn v Simmonds seeks to preserve."

From the example, and the historical approach to codification which he considers, Lord Hope makes a plea on behalf of the judiciary as law reformers. The passages are worth quoting in full:

"One has to bear in mind what judges can and cannot do. One has to bear in mind too the methods that they use. At the centre lies the adversarial system within which they work. This depends to a large degree on the contribution that is made to the way they think by the advocates. The work that they can do, by researching and presenting written and oral argument, must not be underestimated.

"The Scottish system of contract law was developed, as I have said, from the principles of the law of obligations that had been expounded by the jurists. The role of the judges was to fill in gaps where they were found and to develop and apply the basic principles. To some extent they could be creative in carrying out these functions. But their duty was to apply the law as they believed it to be. Their approach is, I think, inevitably, conservative rather than revolutionary. There are limits to the extent that the judges can reform the law. Structural changes must be left to the legislators.

"Furthermore, as the judges see it, the code-makers do not have the same day-to-day experience as they do of how disputed facts are actually dealt with under our domestic legal systems. One cannot, the judges will say, divorce reforms which may at first sight appear attractive in principle from the way in which they will work out in practice in the event of a dispute which has to come to court for resolution. Rules of procedure and rules as to the admissibility of evidence have been fashioned, mostly by the judges, in the light of experience. They should not be discarded without a careful assessment of the consequences of doing so. There is, of course, much to be said for the harmonisation of laws to promote commerce, especially in the international context. But such a process is bound to lead to the making of compromises, as the Scots found when they were confronted with the proposal to codify the law of sale of goods in the 1890s which led to the 1893 Act. The judges would say that each one needs to be examined critically with a close eye as to how the proposed new rule will work out in practice in each judicial system, having regard to its own rules of evidence and procedure. It would only be if it survives this scrutiny that it would be wise to adopt it."


Inner House decides interpretation appeal

The Inner House has decided the case of Aberdeen City Council v Stewart Milne Group Ltd in favour of the Council.  The opinion of the Court, delivered by Lord Drummond Young, can be found here:


This case involves the interpretation of commercial missives in terms of which the Stewart Milne Group had purchased land for development from Aberdeen City Council.  The dispute centred around whether the sellers were entitled to an uplift on the purchase price in terms of clause 9 of the missives. Clause 9 of the missives contained the provisions establishing payment of the uplift:

"9. In addition to the purchase price detailed in Clause 2 hereof, the Purchasers and the Sellers have agreed that the Sellers shall be entitled to a further payment ("the Profit Share") upon the Purchasers purifying the suspensive conditions contained in Clause 4 hereof and issuing a notice to the Sellers intimating to the Sellers that the Purchasers wish to purchase the relevant part of the profit-share as defined in the Schedule to which the Sellers are entitled. The Sellers' entitlement to the relevant part of the profit-share will also be triggered by the Purchasers disposing either by selling or by granting a lease of the whole or any part of the subjects."

The definition of the Profit Share is particular significant: 

Sale of the subjects triggered a profit share, payable to the Council.  The Profit Share was defined as follows:  

“the Profit Share … means 40% of 80% of the estimated profit or gross sale proceeds or lease value lest [sic] the Allowable Costs as herein defined.”

The subjects were indeed sold by Stewart Milne, but, perhaps somewhat unexpectedly, they were sold to a company within the Stewart Milne Group.  This being the case, the sale price was not a market price, amounting to only £483,020.  Stewart Milne argued that the profit share payable to the Council should be calculated by reference to this relatively low, non-market price.  The Council argued that, had the subjects been sold on the open market, the price would have been £5,670,000, i.e. more than 11 times the price at which the Subjects were actually sold.  Not surprisingly, the Council argued that the profit share should be calculated by reference to the open market price at the time of sale.

At the hearing in the Outer House, Lord Glennie clearly did not see this is a difficult case.  He explained:

“It is clear, in my opinion, that the parties to the contract anticipated that the Subjects would be developed, as they were, and that in addition to the initial sale price the Sellers would be entitled to a share in the profit resulting from that development. They have endeavoured in clause 9, clauses 9.1-9.6 and in the definitions in the Schedule to the relevant missive letter, to set out how this is to be calculated.”

In finding in favour of the Council’s interpretation, i.e. that the profit share should be calculated by reference to open market values, he explained:

“It seems to me to be plain that the parties, in approaching the calculation of the Profit Share in the event of a sale, must have contemplated a sale at arms length and at open market value. Otherwise it would be within the power of the Purchasers in every case to defeat the Sellers' entitlement to receive any amount by way of profit share. This is something which, so it seems to me, the parties cannot have intended.” 

As a final comment he reminded us that:

“The test, of course, is not subjective. Expressed objectively, neither party can, in my opinion, be taken to have understood that the contract would work in this way.”

In the Inner House, upholding Lord Glennie's approach, Lord Drummond Young commented (at para 10):

"In our opinion it is clear that the parties must have intended, on an objective basis, that in the event of a sale of the subjects the profit share payable by the defenders should only be based on the actual price paid in the event that the sale is at arms length and at open market value.  If the sale is not of that nature, the profit share should be based on an open market valuation.  The commercial purpose of clause 9 seems to us to be very clear; if, as was obviously likely, the subjects of sale turned out to have a value in excess of the £365,000 paid at the time of the contract, the pursuers were to take a share of the increase in value.  That share was to amount to 32% (defined as 40% of 80% in the definition of profit share) of the increase in value.  If the defenders' construction of clause 9 is correct, it would be open to them to sell the property at an artificially low price to an associated company, and in that way to defeat the pursuers' entitlement to share in the increase in value.  That in our opinion does not make commercial sense; clause 9 is plainly an important part of the parties' bargain, and such a provision should not be capable of being defeated at the whim of one of the parties."  

What is notable about this approach is the emphasis placed on the idea of a commercially sensible construction as an interpretative tool.  It seemed abundantly clear that the parties could not have intended that payment of profit share could so easily be defeated by a sale to a related company.  The importance of a commercially sensible construction was emphasised by Lord Drummond Young (at para 11):

"In recent years the importance of construing contractual provisions in context, and in such a way as to give effect to the parties' commercial objectives, has been emphasized in a large number of cases; the principal authorities are well known and scarcely require discussion.  We note in passing, however, that at least in Scotland this approch is not new; it appears clearly from cases such as Mackenzie v Liddell (1881) 10 R. 705, Bank of Scotland v Stewart (1891) 18 R. 957, and Jacobs v Scott (1899) 2 F. (HL) 70." 

Both this decision and the approach of the Inner House are to be welcomed. 

For those interested in Scottish cases on interpretation of contract, the Supreme Court judgment in Multilink Developments Limited v North Lanarkshire Council was heard on 12 October, and the judgment should shortly be available.  This is a case involving a commercial lease, and the potential applicability of the Hoffmann approach (and my thanks to David Cabrelli for drawing my attention to this link), see:




EU Procurement Law Conference – 8th October 2010

The Edinburgh Centre for Commercial Law were delighted to host an EU Procurement Law Conference in conjunction with Burness LLP on the 8th of October 2010. The conference was extremely well attended with well in excess of 100 delegates, ranging from local authorities, the NHS, Universities, construction and development companies, law firms and many other organisations. 

Although EU Procurement law has been with us in some form since the 1970s, it is only in more recent years that it has received the priority it demands. The last two years or so have seen a cascade of judgments that have answered old questions and raised new ones. The conference took a look at where we are and how apparently conflicting practical and legal requirements might be resolved.

Sandra Cassells, partner at Burness LLP hosted the conference throughout the entire day. The keynote address was delivered by Professor Sir David Edward (formerly Salvesen Professor of European Institutions, University of Edinburgh; Judge of the Court of Justice of the European Communities, 1992-2004) who reminded delegates of the importance of reflecting upon the principles underpinning the procurement Directives, e.g. the provisions of the European Treaty on which the Directives are based ought to be borne in mind and applied as an aid to their interpretation.

Mr. Akos Nagy summarised the position relating to the applicability of the law on procurement in relation to shared services in the public sector and gave some insights into the thinking of the Directorate-General for Internal Market and Services of the European Commission on public sector co-operation. This covers the situation where public authorities co-operate with each other in the provision of services, e.g. through pooling their resources or establishing central purchasing arrangements.

Mr. Nagy's presentation was followed by Iain Mitchell QC who was lead counsel in the case of Sidey Ltd. v Clackmannanshire Council and Pyramid Joinery & Construction Ltd. [2010] CSIH 37; 2010 S.L.T. 607. Mr. Mitchell discussed the case in detail and the threshold criteria in procurement law. In particular, he reflected upon his experience in acting for Pyramid and the lessons which could be learnt.

Dr. Aris Georgopoulos, lecturer in EU and public law and Head of the Research Unit on Defence and Strategic Procurement at the University of Nottingham discussed the important distinction between selection and award criteria in public procurement. In particular, Dr Georgopoulos dissected the decision of the European Court of Justice in Lianikis and its impact on local authorities taking into account a tenderers' experience, manpower and equipment or their ability to perform the contract by the anticipated deadline as award criteria. The fundamental premise of Dr Georgopoulos's presentation was that it was not necessarily the case that Lianikis could be interpreted as having firmly closed the door shut on deploying the above as award criteria. Dr Georgopoulos based this contention on (1) common sense, (2) Recital 46 of Directive 2004/18 on public procurement and (3) the factual and regulatory background to the Lianikis decision. As a Greek national, Dr Georgopoulos was particularly well-placed to offer some unique insights into this Greek case!

In the early afternoon, Mr. Declan Magee, partner in the law firm Carson McDowell gave a fascinating presentation on the procurement experience in Northern Ireland. Mr. Magee explored the recent cases from the Belfast High Court and discussed the fall-out from recent disputes between the public and private sector.

Finally, Graeme Palmer, associate at Burness LLP gave an account of the law which applies where the terms of existing contracts betwen local authorities and successful private contractors are amended. In particular, the central question was whether such alterations will inevitably necessitate a new award. Mr. Palmer's presentation concentrated on the principles in the Public Contracts (Scotland) Regulations 2006 and the case law of the European Court of Justice.

The Edinburgh Centre for Commercial Law was particularly delighted to have hosted an event at the University of Edinburgh which brought academics, legal practitioners and the commercial community from all walks of life together to discuss the practical legal issues which arise from the law of public procurement. Such an event falls squarely within the objectives of the Centre. The topics discussed by the presenters were very interesting and stimulated questions, discussion and debate amongst the delegates. The Centre would particularly like to thank Burness LLP for acting as co-sponsors of the event and Blackwells the book shop.

David Cabrelli

Incorporation of terms and agency law in the sheriff court

Copland v Brogan 1916 SC 27 was the subject of a (not entirely serious) blog entry in this blog recently, see

http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8358.  The case concerned the standard of care to be expected of a mandatory or agent holding goods under the gratuitous contract of mandate.  This case has not been completely forgotten, it seems, having been cited in Kilmarnock Sheriff Court on 20 July this year, in Trigon Tools Ltd v Andrew Wright (PVC) Ltd A 268/09, available here:


The pursuers had, at the request of the defenders, hired to the defenders a small excavator for use at a house in Irvine where the defenders were involved in the erection of a small conservatory.  The contract was oral, having been made in the course of telephone conversations between the parties.  The defenders, as well as using their own labour force, used sub-contractors to carry out certain elements of the construction work.  The pursuers delivered the excavator to the site, along with a copy of an "advice hire note."  On arrival at the site, the advice hire note was signed by an unknown workman and a copy was given to him. Crucially, the pursuers' standard trading terms and conditions, which had not been mentioned in the telephone conversation between the parties, were printed on the back of this advice hire note. 

Two weeks later, the defenders telephoned the pursuers to tell them that the work involving the excavator had been completed and that it could now be uplifted.  Before it could be uplifted, it was stolen by an unknown party. 

The case is useful for a number of reasons.  What were the terms of the contract?  Were the terms those which had been discussed during the telephone conversations?  Or, by signing the advice hire note, had the unknown workman acted as an agent in order to bind the defenders to a contract incorporating the pursuers' standard trading terms and conditions, printed on the back of the advice hire note?  A key issue is, of course, the point at which the contract was concluded.  Was the moment of conclusion of the contract the date of the final telephone conversation between the parties?  If so, the standard trading terms and conditions on the back of the advice hire note came too late to be incorporated into the contract. 

Significantly, a course of dealing existed between the parties.  In previous transactions, the advice hire notes had also been signed by unknown persons present at the defenders' constructions site.  It was possible, therefore, that the pursuers' terms and conditions had been incorporated through their use during this course of dealing.   

Sheriff Murphy made no decision on the issue of whether the terms were incorporated into the contract.  This question could, he indicated, only be resolved following further inquiry into the facts. 

Did the unknown workman have either actual or ostensible/apparent authority to sign the advice hire note, thus concluding a contract on behalf of the defenders, incorporating the pursuers' standard terms?  The Sheriff indicated that there was certainly no actual authority, but ostensible authority was a possibility.  This issue would be analysed by reference to what the reasonable third party would consider the position to be.  Was the workman held out as a representative of the defenders, and therefore able to "bind" the defenders in the exercise of ostensible authority?  Although this point was not explored by Sheriff Murphy, it should be remembered that ostensible authority does not "create" or "cure" contracts where there is a lack of authority.  It operates as a type of personal bar, preventing the principal from denying that the agent was authorised in the context of a case raised by the third party against the principal.  A decision on the issue of ostensible authority depended upon the way in which the site operated, the Sheriff reasoned, and again could only be decided following proof.  This decision on this point seems slightly questionnable – the important issue is the impression a reasonable third party would have of the way the site was run.  Internal arrangements on the site are irrelevant for the purposes of establishing apparent authority.  The external impression is key.  In their averments on ostensible authority, the pursuers cited Armagas v Mundogas (1986) AC 717; First Energy (UK) Ltd v Hungarian International Bank (1993) 2 Lloyds Reps 194; Dornier v Cannon 1991 SC 310 in addition to the most recent edition of Gloag and Henderson's Law of Scotland (the agency section of which was written by Lord Coulsfield).

Coming back to Copland v Brogan, who (on this set of facts) was to be liable for the loss of the excavator?  What are the duties of a person hiring goods or equipment under a hire contract? The Sheriff noted that this person was subject to a common law duty of care which could not be terminated simply by telephoning the pursuers to say that the goods were no longer required.  The defenders referred to Gloag & Henderson Law of Scotland, para 13-07, which suggested that the hirer's duty of care was culpa levis, which counsel  for the defenders' indicated was not a high standard.  The Sheriff relied on Copland v Brogan, Bell's Principles, Wilson v Orr (1879) 7 R 266 and McLean v Warnock (1883) 10 R 1052, concluding that these cases confirmed that such a duty of care existed, and that the burden of proof lay on the hirer (i.e. the defenders in this case) to show the cause of loss and prove a prima facie case that he was not responsible for the same.  In Wilson v Orr the Lord Justice Clerk Moncrieff stated (at 268):

"The hirer of an article under the contract of location is under an obligation to restore the commodity in like good condition as that in which he received it.  If the subject of the contract perished without fault on the part of the hirer, it perishes to the owner and the hirer is sufficiently discharged of his obligation if he had taken reasonable care of it.  But if the subjects of the contract be not restored in the like condition as that in which it was received, there is a certain burden of proof laid on the hirer.  He must show the cause of injury or death, and at least produce prima facie proof that the cause was one for which he was not repsonsible."  

Like Copland v Brogan, again, the person having limited custody of goods which are then lost or stolen bears the burden of providing a reasonable explanation as to what happened to the goods.  This may be no easy task.  

The Sheriff allowed the parties a proof before answer. 

So if you saw someone surreptitiously transporting an excavator through the streets of Kilmarnock in early 2008, you'll know who it really belongs to….